Tuesday, 2 February 2016

SRIT: Scottish Labour's Proposal

A remarkable thing just happened.

With one bold policy announcement Scottish Labour have given voters a chance to vote for an alternative to Tory austerity, a chance to vote to actually use the powers that Holyrood has, a chance to choose an alternative to four more years of just bitching about Westminster. They are suggesting that we actually use the Scottish Rate of Income Tax to apply a small, progressive tax increase as an alternative to cutting public spending.

Followers of Chokkablog will be aware that - despite John Swinney's previous assertions to the contrary - the simple act of increasing the Scottish Rate of Income Tax (SRIT) would be a progressive move. Tax free allowances mean that the more you get paid, the higher the proportion of your income that is taxed - so a "flat" increase of 1% on all tax bands hits the higher paid proportionately more. If you still need convincing, please read SRIT: A Blunt but Undeniably Progressive Tax.

The strongest argument against using the SRIT is not that it isn't progressive (it is) but that it still has a direct negative impact on the take-home pay of the lowest earning tax payers. The obvious counter-argument to that is to simply point out that the taxes raised do not disappear into the ether; a competent government would be expected to use the funds raised to prevent cuts that would hurt the worst off (including those lower earning tax payers). The logic of this may be sound, but the indirect nature of the "avoided cuts" benefit makes it a hard sell to a low-earner seeing their take-home pay decrease even by a relatively small amount.

Which is where we come to today's announcement by Scottish Labour: they would add 1% to SRIT but make a direct1 £100 "refund" to lower earning tax payers to guarantee that they won't be worse off. In fact, all of those earning less than £20k would be slightly better off. There will I am sure be some devil in the detail of administration, but on the face of it it's a simple, pragmatic solution - it allows us to use the SRIT while protecting the lowest earners from any economic downside.

Labour's proposal to actually use the SRIT is in stark contrast to the SNP's proposal to simply do nothing, to passively mirror Tory tax policies. In effect the SNP have thrown their hands in the air and said "if we can't do everything we aren't going to do anything" whereas Scottish Labour have rolled up their sleeves and said "right, how can we use this power to offer an alternative?".

While the SNP have been focusing their considerable political muscle on stirring grievance with Westminster, the Scottish Labour Party have been thinking about how they could constructively use the powers the Scottish Parliament has, have been focusing their efforts trying to work out how to actually prevent the worst of the cuts and to spread the burden of austerity more fairly.

This is a highly significant policy announcement. The proposed 1% increase in SRIT would be expected to raise £0.5bn2 - that's almost enough to completely wipe-out the £0.6bn cuts to Scottish DEL (Departmental Expenditure Limit) proposed in the draft budget for 2016/17.

I have no doubt that some earning £60k pa. will feel paying an extra £10 a week to help prevent £0.5bn of public expenditure cuts is too high a price to pay for "social justice", that some on £150k will honestly believe that paying £29 a week to protect vital public services is simply too much to bear. If that's your view I guess you vote Tory.

But for those who heartily denounce "Westminster austerity", for those who rallied behind the banner of "social justice" during the independence referendum? Well Scottish Labour are now offering them a real choice come May 2016, a chance to actually choose a different path on tax and spending.

I wonder how many will follow their conscience and vote for the progressive option?

***

The following table and charts illustrate the impact of Scottish Labour's proposals on tax and take-home pay for those on different salary levels:

1. The precise mechanics of how this would work are unclear to me; the Press Release simply states "We would establish,
with local authorities, a £100 annual payment to boost the income of low
paid taxpayers."2. The fact that using SRIT is a progressive step is neatly illustrated by the fact that the cost of the £100 bonus to all tax payers earning less than £20k (which more than offsets the impact of the 1% increase in SRIT on those tax payers) is estimated to be just £50m.

33 comments:

Anonymous
said...

Intelligent (and progressive) though this idea is, I suspect it will make a marginal difference at best to results in May. Die-hard separatists and the grievance-mongers won't care. The middle classes will shun the idea of actually having to contribute in return for the benefits they currently get via the SNP. The very wealthy aren't going to vote Labour anyway. In practice, we'll see that Scotland is no more "progressive" or less self-interested than anywhere else. Happy to be proved wrong though. Rocoham

I think this is an imaginative attempt to resolve the huge problem with the SRIT - you can't raise the tax rate without taking money from the lowest paid taxpayers.

However, there's no getting away from the fact that it's a cludge. It's just that sometimes a cludge is the best option you've got. Labour should make it clear that it agrees it would be better if we had full control over rates and bands.

I worry about the implementation. Labour say it'll take £1m to implement, which is a shame of course, but if it has to be done...

I'm also told by @dhothersall it'll be on a household basis rather than an individual taxpayer one. Does that mean a household with 3 earners, one of which earns £19k gets the rebate, but a household with one taxpayer earning £21k doesn't?

Does the £100 rebate get included in calculations for benefits? If so, in a very small way it'll mean the Scottish Govt is subsidising Ian Duncan Smith's DWP.

Obviously there are issues to resolve, but at least (unlike the LibDems attempt) it's a reasonable attempt to go in the right direction.

One thing baffles me. The policy is clearly meant to appeal to left-leaning SNP voters like myself. So whose idea was it to slip a reference into the press release about the First Minister's salary? If you want my vote why would you turn the announcement of a reasonable policy into a personalised attack on the party I voted for a few months back?

Thanks for taking the time to explain the mechanics of the proposed tax rise. Here in England we don't hear much about how SRIT works. This does present a clear choice for voters to choose between investment in public services or cuts.

We are about to enter tax year 16/17, show the calcs across all bands with reference to the increased personal allowance.This proposed increase of 1p will not, I assume, come into force until 17/18 so do the same calcs for the assumed personal allowance applicable (£11,000/£32,300/£43,300)I believe the proposal also includes raising the top band from 45p to 50p which Labour estimate to generate between £60 and £110 million per annum dependent upon behavioural effects. Of course future personal allowances can be changed in the March 16 budget.

"I have no doubt that some earning £60k pa. will feel paying an extra £10 a week to help prevent £0.5bn of public expenditure cuts is too high a price to pay for "social justice", that some on £150k will honestly believe that paying £29 a week to protect vital public services is simply too much to bear.If that's your view I guess you vote Tory."

Based on 2015/16 HMRC data of who pays income tax in Scotland there were:Savers: 41,000 this is excluded as reserved.Basic rate: 2,090,000, what is the number that earn £20,000 and less? Higher rate: 372,000Additional rate: 17,000

Retaining the same tax base spread calculate the potential increased tax revenue in relation to the proposed tax rises.

Anomanlies will always occur, you have a couple both earning £19,000 per annum each what is their gain against a single householder earning £38,000 per annum.

Will this £100 bounty for those earning £20,000 and under (how much will this cost to administer?) be classed as income?If it classed as income and you are a positive beneficiary of the bounty will this affect any working tax credit or other benefit presently being claimed?

Of the suggested £500 million extra revenue, will it be spread equally on a per capita basis across the local authorites?

As always, with ALL political parties, the devil is in the detail, not forgetting the law of unintended consequences.

"One thing baffles me. The policy is clearly meant to appeal to left-leaning SNP voters like myself. So whose idea was it to slip a reference into the press release about the First Minister's salary? If you want my vote why would you turn the announcement of a reasonable policy into a personalised attack on the party I voted for a few months back?"

- It is a fact presented for maximum political gain, not a personal attack. When the SNP, as they surely will, point out that 'hard-working Nurses and Teachers' will pay more tax, that is also a fact presented for maximum political gain, and is not a personal attack on those proposing increasing the taxes on 'hard-working Nurses and Teachers'.

As you rightly point out, you are the sort of person that needs to be convinced by this, and I am genuinely interested as to why you saw this as a personalised attack and not just a relatively standard political device?

If the First Minister attacks this policy on non-procedural grounds (e.g. the costs of implementation, etc may well be valid reasons for objecting), then it is nothing to do with her current salary, rather her (or her party's) political leanings.

We can certainly have a good discussion about whether a higher rate of personal income tax needs make a nation's economy intrinsically any less competitive (see Scandinavia). Isn't the question rather about the sort of society we wish to live in, and whether/how much we (collectively) are prepared to pay to achieve it? In the case of a higher SRIT there might well be some who decided that their self-interest over-rode the common good and chose to move somewhere with a lower tax rate; that is very much the spirit of our times. Whether it is a real and significant economic risk is another matter, and I suspect it may be as baseless as the self-serving mantra trotted out to justify exorbitant salaries and bonuses, that these are necessary because otherwise the "top talent" would move elsewhere. Rocoham

I would like to see how it's going to work. I did like Blair McDougall's comment elsewhere about debating "the smaller details".

I suspect the details aren't so small.Unlikely to be via the HMRC;is it going to be a benefit then?See http://lallandspeatworrier.blogspot.co.uk/2016/02/questions-questions.html for some of the issues that might entail.

@Anon.I don't think its as simple as that, when the barriers to movement are low in some cases.A penny difference could make a big difference for the very wealthiest, and if it does happen Scotland would lose ALL their income tax, not just the penny difference.

But this is more about the *perception* of Scotland becoming the highest taxed part of Britain. That is sure to be a factor affecting new business or individuals decisions.

Say a company is looking to locate an business in Newcastle or Dundee, then it could well be the deciding factor. Especially when it comes to the thought of senior staff paying more personal taxes than in England - with the potential for that difference to increase even further in the future once that dam is burst.

So it may be 'anti-austerity' in year one, but over time it would see a gradual reduction in our tax take relative to the rest of Britain, leading to more austerity in the future.

I don't think a discussion on whether this measure is 'anti-austerity' can have much merit without taking that into account.

My only comment is not about equity (the numbers are largely too small on the downside to be complaining). It's more about the macro side: the sums broaden the spending at a time when both Scotland and rUK are running deficits. I'm not sure it's prudent and is somewhat indicative of a problem with SRIT; what's the actual downside to Scotland of ratchetting up taxes to spend more instead of actually prudently trying to narrow the deficit? I have the same beef to be honest with Osborne's give aways in the last financial statement.

While I don't mind paying additional tax to maintain services it's the circumstance surrounding it that will continue to set a dangerous precedent. As pointed out in the article itself this proposed increase would about offset the coming cuts in Scotlands DEL Budget. These cuts on top of CUTS already absorbed in previous years.

Does this not therefore leave future WM Governments open to continue to cuts Scotlands budget on the basis that Holyrood can simply raise taxes if it wishes? There will be many who actually enjoy that prospect to be set upon the SNP but this ignores the impact on the country.

Had we got a Labour Government at the last election would Scotland have expected the same cuts to DEL as the Tory government has now delivered? Assuming not we are then back in the age old Scotland problem stretching back to pre devolution. It receives the impact of a Tory Government it does not vote for yet now that Government can cut the budget at will and point to Holyrood regardless which party is in Government.

My position remains the same. Certainly the Scottish Government can be doing more to maintain services and deliver social justice. Until it has powers to control ALL aspects of it's economy and not just the blunt instrument of a flat rate of tax it's pointless. Furthermore using this blunt instrument will only injure the Union even further. It would be legitimate grievance to pay more tax year on year to offset a WM Government cutting budgets. When Scotlands finances improve , potentially through a rising oil price, it would only cause further division when Scotlands tax payers continue to be asked to pay more than counterparts in the South.

There is no reason why we cannot achieve Social Justice and a fairer taxation system through a more extensive Federal model in Scotland WITHIN the UK. Without that this is short term thinking that will quickly create more division and lead to another referendum within 10 years.

So the 1p tax rise ammendment was defeated, no surprise there, that ship has sailed. Will the SNP be affected? only the ballot box will tell.The Courier on-line poll, last time is saw it, was 60/40 against the tax rise.What will be of more interest is what the parties will include in their manifestos for possible tax regimes in line with Fiscal Framework changes (assuming they get through).

I understand that to refer to the base transferred (the 10p) - if it offset additional taxes raised the whole exercise would become pointless (why raise a tax if you automatically lose what you raise from the block grant?).

There has been no agreement yet on how the use of SRIT powers will impact the block grant -- only that it will be reduced.

100% deduction of revenues raised would obviously be the worst-case scenario.

It is therefore irresponsible of any party to talk about the tax changes they would make - and the additional money this would make available - and what they would do with it - when they simply do not know.

Block grant will be reduced in line with the baseline amount of tax revenue transferred to SP under the agreement. Like for like, no detriment to either party. What SP chooses to do in terms of raising tax above and beyond that baseline does not incur any further reduction. So while there are plenty of don't knows associated with the SLP's proposal, that isn't one of them. Rocoham

personally I am sanguine about tax increases , (if its not higher tax it will be something else , and you can only pay , what your profits allow , as the North Sea sector is finding now as well )

Thx for the excellent graphs @KEV , though I think the whole suggestion , by the LIBS and now LAB , is a political point rather than an economic one .

They are proposing an alternative to "austerity , cuts , Tories blah ,blah " , and it is going down poorly .

It wont get them elected , (they dont want to be elected ) They want the SNP to keep the ball , and play on ,

If they are not going to do anything about austerity , save sign up to some "austerity-lite , as per the GE " , then Scotland's problems of inequality and deprivation , cannot be so pressing , more "Give up SKY Movie package , and forego a quarterly upgrade on the iPhone , kind of frugality ,"

By not raising tax , the SNP are in tacit agreement to this , and which is more , in alignment , with the only other party of low tax , the dreaded Tories .

This penny for Scotland is already beginning to drop ,another 5 years of the SNP , and hope will give way to staleness .

it was ever so .

Scots are left wing when the public sector is spending money on them , and right wing when it comes to paying for it .

I thought Sturgeon's reported comments on the Labour/Lib Dem tax hike proposal were revealing. The rebate was a "con" and Conservative proposals to abandon free prescriptions and tertiary education were described as a further tax on working people. Sturgeon's poverty adviser, Naomi Eisenstadt, has criticised free prescriptions and tertiary education because they do not help the poor, but it is clear that Sturgeon has rejected the advice. The upshot is classic SNP: frighten the low-paid into thinking that voting Labour is against their interests, whilst keeping the economic privileges of the Scottish middle class intact. Brilliant stuff. Arguably the Labour proposal is a year too early. Wait until the basic rate can be left intact, and only the 387,000 on higher rates can be targeted.

On the issue of whether it affects the block grant, my understanding is that the direct answer is no. If Scotland chooses to raise rates in out years, it gets to keep the increased revenues. However, the problem starts if, for example, the higher tax bands cause a flight of higher-paying tax payers, with a negative effect on Scottish economic activity and a net loss of tax revenue rather than a gain. The block grant formula would, on the Treasury view, be constructed to see through the actual change to a theoretical income had the tax base change not been made. If there is a net loss of revenue to Scotland from raising Scottish tax rates, it is not for rUK to make up the loss. The 'no detriment' principle does not apply to self-inflicted detriment. This is why Swinney is digging in. He wants an asymmetry of treatment. The SNP wants to keep any upside but make rUK pay for any downside.

Since Mme Lagarde of the IMF is talking in very pessimistic terms about the long-term negative effects on oil economies, of which the Scottish economy is an example, albeit a very small one, one can see that Swinney will be desperate not to see Scottish Government revenues decline on the SNP watch, because he and the SNP will cop the flak. But to an outsider such as myself, the whole SNP drive for independence is so economically illiterate that self-inflicted detriment is an inevitable consequence of SNP Government. Not surprisingly, Treasury wants to avoid the trap that Swinney is trying to lay. The measure of Swinney's desperation is his willingness to halt the whole devolution exercise if he cannot get rUK to compensate for self-inflicted economic detriment. Best of luck!

On block grant adjustment - it *is* clear that the simple act of increasing SRIT would not reduce the block grant. It is also clear that the principle of no detriment means that the act of transferring the tax (the 10p) and then *not changing it* should be of no detriment to either party.

There are some complexities around interpreting no detriment clause - but whether or not we get to keep the results of an SRIT increase is not one of them.

So in effect you're arguing that if Swinney had had the cojones to apply an across-the-board tax hike at his last budget then Westminster could/would have kept some or all the increased revenues? I think that if that had been remotely an option then we would never have heard the end of it from the SG, and that would have been the reason cited by Swinney for staying in line with rUK tax rates. As it was he ducked back under the (disproved) shelter of "not progressive". Apply Occam's Razor, aka Walks & Quacks Like A Duck: there is no point whatever in devolving tax powers to SG if they cannot derive any benefit from using them. The no detriment principle applies to the starting point of any new system; beyond that, what happens in Scotland stays in Scotland. Rocoham

@ Anonymous: Exactly. The "no detriment" clause is irrelevant. It would be politically impossible for Westminster to withhold (from Scotland) any additional revenues raised (in Scotland) from an increased rate of SRIT.

(1) David Mundell, the UK Secretary of State for Scotland, is reported as saying that any excess tax revenue raised by the Scottish Government stays in Scotland. Increases in tax in rUK should stay in rUK, according to Mundell, and none of the extra should go to Scotland. The fun starts when the rate of increase in the rUK population exceeds that in Scotland. Even if there is no change in tax bands in rUK, my understanding is that the rUK Treasury will enjoy an increase in tax revenues. There may be many reasons why the Scottish rate of population increase is lower than rUK. A disproportionately ageing population will be less fertile; there may be economic migration to rUK from Scotland; or there may be higher levels of migration into rUK from the rest of the world over that into Scotland. All these are, in principle, addressable by the Scottish Government and, although it may be harsh to say so, differences in population trajectories would be regarded as a self-inflicted detriment. It is my understanding that the same would apply in reverse if the rUK population increased at a rate that lagged the Scottish increase. For some reason, Swinney appears implicitly to believe that the Scottish rate will lag behind that of rUK. Hence, the prospect of "potential" losses of billions of pounds in the Fiscal Framework referred to by Sturgeon and Swinney.

(2) I made a lazy mistake in my previous response. I assumed that if the increase in SRIT by 1p was delayed for a year, it could be targeted with precision to higher income tax brackets. That part is still true, as I understand it. But Brian Wilson points out in today's Scotsman that the ability to raise large sums from the higher brackets is limited by their small size. If he is right, helping the really poor in Scotland requires redistribution of net income within the lowest tax band bracket of earners. That is going to be a difficult sell to people feewling the pinch, and Sturgeon and Swinney know it. Better to leave SRIT alone and attack Labour using the crude tools of misrepresentation.

Comment: If I may stray from what I consider to be largely factual points, the problem for Scotland under devolved powers is to avoid disabling itself by running a tax policy that is more burdensome than that of an immediate neighbour, rUK, whose economy is over 10 times their size. My own guess, with no direct evidence, is that Scotland will need to run a tax policy that is lighter in its touch than that of rUK. Not impossible. We know that the Scottish Government (together with the Welsh Assembly) has found a way of making the NHS cost less per capita than rUK. How do we know? Because the Barnett formula, which factors in a formula for Scottish NHS expenditure that recognises lower population densities in Scotland, delivers cash from rUK that is spent by the Scottish Government on things other than the Scottish NHS.

Despite previous experience of Wings, I followed your link. As I learnt from my mistake I noticed that, actually, he seems to think that a penny increase in tax was a good idea when the SNP favoured it.MD.